Property Tax Reform in Developing and Transition Countries

Other well-meant attempts to make the property tax more progressive may be less successful. One such
approach is to provide tax preferences to pensioners. However, not all retirees are poor, and without an
income test, the net for this preferential treatment is likely to capture many of the non-poor. Another
approach, practiced in Southeast Europe, is to increase the property tax exemption for larger family sizes.
For example, in Serbia, owner-occupiers receive a 40 percent reduction in taxes, and this is increased 10
percent for every member of the household up to a limit of 70 percent (Begovic, 2004). Yet a larger
family size by itself does not necessarily signal that the property tax is less affordable; and besides,
monitoring such a provision is extremely difficult.
Third, there are the “social engineering” exemptions, and those given for political reasons. Chief among
these is the owner-occupier exemption, which is used in nearly all countries. It may be politically popular,
but it is regressive in its impact and imposes a significant tax expenditure on local budgets. Moreover, the
owner-occupier exemption increases administrative costs because it requires classification of every parcel
in terms of tenure, and it usually requires the application of differential nominal tax rates or differential
assessment rates. Whether the owner-occupancy exemption achieves the social purpose of encouraging
homeownership is debatable at best. Whether it achieves the political goal of gaining favor with owneroccupiers
is less debatable. Some countries go even further. Residential property is not taxed at all in
Central and Eastern European countries like Latvia and Lithuania, an exclusion that narrows the tax base
considerably.
A fourth class is the exemption from property taxation of government-owned properties, and properties
occupied by nonprofit enterprises. This exemption deprives local governments of the right to charge for
some of the land use within their boundaries and it imposes a revenue cost. The considerable services
provided to those properties are, therefore, not compensated by the users (Bahl and Linn, 1992, p. 100).
Mathur, et. al. (2009) estimate that the revenue cost of exempting government property is equivalent to
about 12 percent of collections in India’s 36 largest cities.
How do developing and transition countries define a “best practice” with respect to exemption policy
Three steps might be taken.
First, institute a periodic review of property tax exemption policy with the goal of determining whether
exemptions continue to serve their intended purpose. Place a moratorium on any new preferential
treatments, and introduce a sunset for all existing preferential treatments, or at least a time period for their
review.
Second, adopt the practice of valuing all property, including that which is exempt, on an annual basis.
Use this information to prepare an annual tax expenditure budget for the property tax, identifying all
property tax revenues foregone by exemptions and reliefs.
Third, and based on this valuation determined by the tax expenditure budget, charge a payment in lieu of
property tax for government properties and for most not for profit uses of property. Such a practice is
followed in many countries, including, for example, India and Kenya. In Mumbai, the payment in lieu is
set at 80 percent of the tax that would have been paid if the property was privately owned (Tata Institute
and University of Mumbai, 2001). 12
12 In Canada, it is the federal government, and not the taxing authority, which determines the values and rates to be
used in the payment in lieu calculation with respect to federal property.
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